Activity Based Costing/Management for Federal Agencies

In 1995, the Federal Accounting Standards Advisory Board (FASAB) issued a recommended accounting standard titled "Managerial Cost Accounting Concepts and Standards for the Federal Government".  It was subsequently adopted by OMB and GAO as Statement of Federal Financial Accounting Standards Number 4 (SFFAS No. 4) and made effective for federal agencies beginning in 1998.

From the first paragraph of SFFAS Number 4, it is clear that this reform is seen as being of fundamental importance to all program managers, and not just to the agency's accountants.

1. The managerial cost accounting concepts and standards contained in this statement are aimed at providing reliable and timely information on the full cost of federal program, their activities, and outputs. The cost information can be used by the congress and federal executives in making decisions about allocating federal resources, authorizing and modifying programs, and evaluating program performance. The cost information can also be used by program managers in making managerial decisions to improve operating economy and efficiency.

This managerial cost accounting statement includes an emphasis on identifying the unit costs of activities, as stated in its following paragraph:

16. The Chief Financial Officers Act of 1990 includes among the functions of chief financial officers 'the development and reporting of cost information' and 'the systematic measurement of performance.' In July 1993, Congress passed the Government Performance and Results Act (GPRA) which mandates performance measurement by federal agencies. In September 1993, in his report to the President on the National Performance Review (NPR), Vice President Al Gore recommended an action which required the Federal Accounting Standards Advisory Board to issue a set of cost accounting standards for all federal activities. Those standards will provide a method for identifying the unit cost of all government activities.

It also explains that the key to determining the efficency and effectiveness of federal programs is being able to measure the unit costs of outputs and outcomes.

35. Measuring costs is an integral part of measuring performance in terms of efficiency and effectiveness. Efficiency is measured by relating outputs to inputs. It is often expressed by cost per unit of output. While effectiveness in itself is measured by the outcome or degree to which a predetermined objective is met, it is commonly combined with cost information to show 'cost-effectiveness'.

In order to identify the unit costs of their activities, federal agencies are urged to consider activity-based costing (ABC) and activity-based cost management (ABC/M) as part of their GPRA performance measurement.

147. Several costing methodologies have been successful in the private sector and in some government entities. Four are briefly described below for agency consideration. It should be noted that Activity-Based Costing has gained broad acceptance by manufacturing and service industries as an effective managerial tool. Federal entities are encouraged to study its potential within their own operations.

149. Implementing an ABC system requires four major steps: (1) identify activities performed in a responsibility segment to produce outputs, (2) assign or map resources to the activities, (3) identify outputs for which the activities are performed, and (4) assign activity costs to the outputs.

Unfortunately, despite the fundamental importance of this cost accounting reform, the Government Accountability Office (GAO) has in the past noted that federal agencies have generally not achieved meaningful compliance, as described on our ABC/M Compliance page.